Over-the-Counter U.S. Stock Trading Halted on Network Outage

Trading of over-the-counter stocks
was halted for 3 1/2 hours today in the U.S. after a network
failure disrupted one of the main venues, prompting regulators
to order a complete shutdown.

Transactions were stopped at 11:25 a.m. New York time
because of a “lack of current quotation information,” the
Financial Industry Regulatory Authority said in a statement. OTC
Markets Group Inc. resumed trading at 3 p.m., recovering from a
disruption at one of its network service providers, Chief
Executive Officer Cromwell Coulson said.

The shutdown happened on one of the biggest trading
sessions this year as Twitter Inc.’s shares debuted. The
disruption only paused equities such as Fannie Mae and Freddie
Mac, not the more significant companies listed by NYSE Euronext
or Nasdaq OMX Group Inc. (NDAQ) Still, it tested investors’ nerves
following a series of technical mishaps since August that have
boosted concern that the infrastructure of American securities
markets is unreliable.

“Obviously it’s not as large of an issue as it would be if
it occurred on Nasdaq or NYSE, but it’s problematic
nonetheless,” said Mark Turner, head of U.S. sales trading at
New York-based Instinet Inc.

Companies whose shares trade over the counter make up a
small fraction of total American transactions. Yesterday, the
value of trades was about $1 billion, compared with $227 billion
for stocks listed on the NYSE or Nasdaq, according to data
compiled by Bloomberg.

Latest Mishap

The pause was the latest mishap to freeze part of the U.S.
equity market, including a three-hour halt for thousands of
stocks on Aug. 22 because of a computer error at Nasdaq. The
entire options market was halted briefly on Sept. 16 because of
a malfunction at an NYSE Euronext (NYX) division.

Coulson said he was unhappy that OTC Markets couldn’t
handle today’s breakdown.

The OTC Markets network service provider “had troubles,
but it’s our fault for not having the diversity we need,”
Coulson said during a conference call with journalists. “Many
of our customers who came in through our other providers were
all good, and the problem was getting that critical mass of
diversity for our broker-dealer community.”

Coulson said Twitter’s initial public offering complicated
efforts to resolve today’s malfunction. OTC Market was ready to
switch to a backup site outside Philadelphia, but some brokers
didn’t want to shift while they were waiting for Twitter to
start trading. The social-media company opened on the New York
Stock Exchange at 10:49 a.m. New York time.

Early Issues

OTC Markets, which hosts trading in more than 10,000 over-the-counter securities, began experiencing connectivity issues
at about 6 a.m. New York time, Coulson said. The troubles
affected quotes and trade messages, said Saskia Sidenfaden, a
company spokeswoman.

Throughout the morning, broker-dealers told Finra that they
were having trouble trading over-the-counter equities, Steven
Joachim, executive vice president at Finra, said during a phone
interview.

“We decided that in order to ensure that investors could
trade with confidence and that the prices they were getting were
fair and equitable, it was best for us to halt the market,” he
said.

The decision was taken after discussions with the U.S.
Securities and Exchange Commission, Joachim said. Finra will
analyze today’s events to see if any changes are needed.

“We will do a very careful review, with the Commission, of
all the activities and our comfort level with how the market
structure operated for OTC equities,” he said. The regulator
will “decide whether there’s some actions that should be
taken,” he said.